Consolidation; just who benefits?


What strikes you listening to the hour long debate at the PLSA investment conference is the absence of any of the small employers or their trustees or their advisers who the PLSA wish to consolidate.

You can watch the video here

I work for one of the small advisers in question and can confirm that we sent no-one to Edinburgh because no one wanted to go, because we were busy working with clients and because the expense claims for this single event would dwarf most of our annual expenses.

The various dignitaries on the PLSA taskforce do not represent small schemes. What interests me about the video is that it shows how little appetite for consolidation there is within the DWP, tPR and PPF.

Taskforce members

Ashok Gupta (Chair), Duncan BuchananFrank Johnson, Paul Johnson, Jackie Peel, Tim Sharp, Stephen Soper, Robert TalbutPaul Trickett, Kevin Wesbroom, Lesley Williams

Read the biographies if you like, these people advise at the top end of the market, or run pension schemes way outside the scope of the consolidation.

Most of them know me, and I know most of them, and I am quite sure that most of them would not admit to knowing what it’s like working for a small employer, being in a small employer’s pension scheme or even advising one or another.

So the sweeping generalisations that can be found  both in Ashock’s address, and in his DB Taskforce’s second paper (the case for consolidation) are based on observation not experience.

Inexperience with small schemes

Because the working party is not working in the small scheme sector, it has not the experience we have of working for disconnected employers in multi-employer schemes (Superfunds). Our experience is not happy.

Nor are they familiar with consolidating schemes -even when the end destination is an insurance buy-out or the PPF.

And on a more positive note, they probably haven’t had the pleasure and privilege of working with the trustees of small family businesses for whom the pension scheme is part of the fabric of the company and for whom pensioners are part of the company’s extended family.

Nor will they be familiar with the great pride among many small trustees that they continue to pay benefits in full and have every intention of doing so for decades to come


Underestimating advisers

And because the advisers on the DB Taskforce do not advise in this space, they are unaware of the investment strategies of these schemes which typically are set for the future with investment in real assets – focussed on growth

Nor will they be aware of the extraordinary vibrancy within firms like First Actuarial , a melting pot of bright ideas on how to engage trustees, employers and members with good ideas.

Nor will they be aware (as yet) that 62% of the pension professionals who completed this week’s Pension Buzz were opposed to option 4 of the report (Superfunds) and would undoubtedly explain why they wouldn’t comply with the PLSA’s edict.

Overstating the risk

The reality of pensions is not quite as stressful as the DB Taskforce would have us believe.

Here, for instance, are some numbers that suggests that there is not a systemic problem with pension schemes.

FABI 3 months

The 1.38% attrition rate of failing employers (assumed by the paper) is rather higher than the 0.45% attrition rate which comes out of other analysis.  So the stat that 50% of people have a 50% chance of not having their benefits being paid in full appears to us “Fake News”.

Regulatory arbitrage

To consolidate, the PLSA would need a scheme to be 90% funded on the PPF basis. In practice, such schemes have a long-term sustainable future with little chance of falling into the PPF – see above.

The premium needed to slip into a Superfund might be slightly lower than buy-out with an insurer, but you have to question whether this is merely a matter of capital support for those in the Superfund. The solvency requirements for an insurance company are much stronger than for a big-fat master trust.

Arguably , all that these putative Supertrusts recommend is a cheap route to finance, a regulatory arbitrage against the insurers.

When I was very little a man called Beeching had the idea of consolidating all the railways in Britain into a few super lines. He pulled up the branch lines and built over the tracks.

The super lines didn’t turn out so super and the infrastructure that had been building for decades was lost for ever.  He thought then that the demand for railways was in so decline, he didn’t understand cyclicality.

I rear that the DB Taskforce is making the same mistake as Dr Beeching.

The actuarial equivalent

Actuarial equivalence is a fab idea that never seems to work out in practice. In theory it allows you to reconcile and  equalise GMPS, it allows you to harmonise benefit structures, pool assets and liabilities and run multi-employer funds with various benefit promises.

All of these things can be done in theory. But the theory is so complex, no one can ever quite take the decision to press the button and even simple things like DC mergers, drag on for years.

The project that Superfunds would kick off would require either an actuarial steam-roller or an army of conscientious actuaries. Either way, the implementation of consolidation would be fraught, long and expensive.

It is not often that you hear me poo-pooing an innovative idea, but this idea of semi-compulsory consolidation is dangerous and wrong. I don’t think it is doing anyone much good. The PLSA may feel it is in its interests to rationalise our pension system but I can’t see these Supertrusts reviving its fortunes. The large consultants will look forward to some mandates in the longer term, but this is scorched earth stuff.

Let’s turn this around and enjoy what we have – the magnificent legacy of 70 post war years of saving. 6000 schemes, the vast majority of which are in good shape and an extraordinary infrastructure of good quality trustees, advisers and regulators with the excellent PPF as a safety net.


You can read the paper here

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Consolidation; just who benefits?

  1. Spoken with all the technical background but little if any practical experience of this market and the types of schemes. If Collective DC got kicked into the long grass I can’t see this getting seriously discussed in Whitehall anytime soon.

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